There's a sting in home loan tale
Floating rate loans are being repriced even without rise in benchmark prime lending rate.
By Mayur Shetty, TNN |
| Floating rate loans are being repriced even without rise in benchmark PLR Banks raise floating rates by reworking spreads at which loans are provided For floating loan takers, rates move up faster than those for other borrowers |
MUMBAI: Home loan borrowers are again getting a raw deal in a rising interest rate regime. In the past, floating rates refused to fall even as banks allured new customers with lower rates. Now, borrowers are being told that their floating rate loans have been repriced even without a rise in the benchmark prime lending rate (PLR).
This means that for a floating rate loan customer, rates may move up faster than that for other borrowers. Most banks, in the last six months, have raised their PLR once by around 50 basis points (bps). However, home loan rates have been revised thrice this year.
Banks have managed to do this by reworking the spreads at which home loans are being provided. For instance, while loans at the beginning of the year were advanced at a spread of 2.5% below PLR, banks are now charging 1.75% below their PLR. So, if a bank revises its benchmark PLR by 0.75%, a home loan customer ends up paying 1.5% more.
In an extreme case, Bangalore-based Canara Bank ran a promotional scheme in Pune where home loans were advanced at a concessional rate of 7.25% for up to five years. The floating rates were worked out to be PLR minus 350 bps at a time when the PLR was 10.75%. Since then the bank raised its PLR by 75 bps to 11.5% in May. However, home loan borrowers were told that their interest burden has gone up from 7.25% to 9% — an increase of 175 bps.
Earlier this year, it was the turn of borrowers with fixed rate loans who were in for a rude shock. Most of the borrowers, who had raised loans from state-owned banks, discovered that their loans were fixed only for the initial two to three years.
Most of the lending banks took advantage of an escape clause in the loan agreement that allowed them to revise rates even in floating rate loans. In the past, banks refrained from passing on the benefits of market movement in rates to floating rate customers by linking home loan to a separate PLR. However, the Reserve Bank of India (RBI) had frowned on this practice and had suggested that banks could have a common PLR for all loans, but vary the spread.
Interest rates in the banking system have risen sharply in the last nine months. After finding it difficult to manage interest rate risk, many public sector banks have stopped offering fully-fixed housing loans. Borrowing costs have gone up for the government as well with interest rate on 10-year bonds touching 8% two months ago, which is more than what an individual paid on home loans a year ago.
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